The Argument Against Fiscal Cliff Austerity: Just Look At Britain's Mess

This is what millions of mothers say to their small children for them to down that spoon full of cough syrup. What doctors tell obese patients to talk them into exercise and more broccoli. And it's the line that many Republicans and conservatives right now are trying to use—to convince us that austerity is the key to solving the fiscal cliff and America's broader problems, too.

The line works for Mom, but it shouldn't for Congress. It hasn't in Britain.

For a clear-headed explanation of why massive spending cuts would likely injure the U.S., not fix it, look no further than Adam Davidson's New York Times Magazine piece on Adam Posen, a 40-something who, until very recently, was a key British government economist (and the only American to serve in that capacity). Posen would regularly speak out against the U.K.'s massive austerity program—set to last until at least 2018 if Prime Minister David Cameron keeps his job—and the damage it has wrought on the economy.

Brits have something much like our Federal Open Market Committee. It's the Monetary Policy Committee. Posen served on that nine-member body until earlier this year. Frequently, in his tenure there votes come back as 9-1—Posen as the lone disenter. He was no fan of Cameron axing the government's budget.

What has British achieved through its austerity? Since Cameron took office in spring 2010, unemployment hasn't budged much past 7.9%. Consumer confidence declined further. And gross domestic product, the sum of all goods and services, is below the level when Cameron assumed power.

A quite damning case against austerity, you might reckon. And you might think the same thing would happen here in America if we decided to opt for that sort of thing. Because, if you want people to keep buying anything more than basic everyday necessities at Wal-Mart, and want them buying tech gadgets from Apple and Microsoft, and shopping at Kroger's and Whole Foods, cutting a much-relied-on lifeline—government spending and assistance—makes little sense. It's less about whether you like that the government gives hand outs and more about how great the damage would be if that stopped.

If it did, it would sap demand. That's what Posen found in the U.K. He diagnosed Britain's ailment as a lack of demand, not a supply problem as British conservatives had argued: Britain, they said, was simply fundamentally less capable. It's important to understand the contrast between these opposing mindsets:

It was a subtly (but crucially) different way of looking at the problem: the country was not truly less capable. The problem was not one of supply, Posen suggested, but rather of demand. Workers were not less productive than they used to be. They merely needed some help from the government and the central bank—rather than budget cuts—to close the output gap.

America faces a similar demand problem. In the last month alone, consumer sentiment, by at least one measure, experienced the greatest monthly plunge since the height of the financial crisis. Consumer spending, the key driver of the U.S. economy, this year had outpaced business spending. (Corporate America seemed more finely attuned to the eventual showdown in Washington, D.C. By some estimates, some half a trillion in business cash is on the sidelines.) Consumers are now flagging, too.

Now, before you dismiss Posen and his demand-side solution to our problems, understand something. He is not some silly crackpot. He is a highly intelligent, roundish bald man—a Harvard-educated economist whose analysis of Japan helped that country end its Lost Decade in the early 2000s. There, he found that the Japanese central bank needed to print more money, and that the government needed to embrace a spendthrift nature. It worked.

The Times Magazine writer who profiled him, Davidson, minces no words about whether Posen's Keynesian-driven theorems can find a place in America: "Doing neither stimulus nor austerity—which is basically what’s happening in the United States—isn’t working, either. So, [Posen] says, let’s try stimulus, even if we don’t know for sure it’ll do the job."

What Posen offers is a different prescription for achieving better health. One that won't sting as much.